7 PM Editorial |Does India Need a Fiscal council?| 11th July 2020

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Does India Need a Fiscal Council?

What has happened:

COVID 19 pandemic has resulted in weakening of fiscal situation of centre and states. Tax revenues have reduced due to subdued economic activities. Whereas, expenditure has risen due to spending on healthcare, social security and economic revival, to tackle the fallout of the pandemic. As a result, the fiscal deficit of the centre is estimated to double from budgeted 3.5% of GDP to around 7%[IMF].

This steep rise in fiscal deficit will impact medium term growth prospects due to interest burden. In addition, ratings agencies consider fiscal deficit as a parameter in ratings which impact capital flows into the country. These concerns impose restrictions on expansionary fiscal policy strategy to tackle pandemic.

In such a situation, many economists have pointed out that fiscal deficit limits should not constrain spending to stimulate the economy. They suggest expansionary fiscal policy during pandemic combined with fiscal consolidation plan post pandemic will help retain market confidence. Yet such a strategy may still lead to ratings downgrade and resultant capital outflows.

To increase the confidence in fiscal consolidation, a fiscal council which enforces fiscal discipline is suggested. This can signal intent to maintain discipline in medium to long term which can reassure markets and credit agencies.

Fiscal council and its mandate:

Fiscal council is a body intended to provide independent analysis of fiscal situation and prospects while considering macroeconomic parameters. 13th Finance commission(FC) had first proposed such a body. This was later endorsed by 14th FC and N.K.Singh committee to review FRBM(Fiscal Responsibility and Budget Management) act.  50 countries in the world have such bodies.

Intended functions:

• Acting as watchdog to prevent fiscal irresponsibility by providing independent analysis to public
• Macroeconomic analysis of stability of growth, inflation, forex reserves etc
• Analysing current fiscal situation vis a vis limits under FRBM. Recommending changes to fiscal strategy to ensure consistency
• Analysing deviations from fiscal limits and providing advice to the government. N.K.Singh panel proposed mandatory consultations for deviations from fiscal limits.
• Providing multi year fiscal forecasts
• Improving fiscal data

Critique of such an institution:

• Ineffective without parliament holding the government accountable: FRBM mandated fiscal policy strategy statementto build credibility to government’s fiscal stance. Yet this report is seldom discussed in parliament. In such a situation of lack of accountability, the fiscal council may not be able to hold the government accountable for deviations from fiscal discipline.
• Leads to duplication:
  • RBI, CSO and other agencies(ratings agencies, IMF, world bank etc) provide macroeconomic analysis. Macroeconomic and fiscal estimates by the fiscal council will have the same credibility as estimates by agencies like RBI, CSO etc. Hence there is no need for new institution for providing estimates
  • CAG keeps check on any creative accounting of government. Hence a new watchdog is not needed to do so.
• Dilution of accountability of the finance ministry: Any failures in estimating fiscal prospects may be blamed on the institution. Finance ministry must be held accountable for estimates used in the budget.

Alternative to fiscal council:

CAG can constitute a 3 member committee during the budget period. This committee will scrutinize the budget and provide independent analysis of fiscal situation as well as budget data.

CAG will provide secretarial and logistical support. RBI, finance ministry, NITI Aayog and CSO can depute officers to aid the committee. Once the committee submits its report, it will be disbanded and its mandate ends.

This serves as a credible alternative to fiscal council by overcoming its limitations.

Source: https://www.thehindu.com

Mains question:

1. A fiscal council which acts as a watchdog on government’s fiscal discipline is the need of the day in India. Critically analyse? [15 marks, 250 words]